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The sharp increase in domestic natural gas production in recent years is already driving more demand for new pipeline infrastructure. The EPA proposal could provide additional motivation—and potentially a new funding option—to build new assets sooner, Nora Pickens, an S&P analyst, said Sept. 11.

This could ultimately lead to improvements in the credit ratings of midstream companies, according to S&P.

The EPA's proposal, which would set a carbon dioxide emissions rate for each state with flexibility in how to get there, is expected to lift demand for natural gas because it has fewer carbon emissions than coal.

Pickens said “we're already seeing” companies, such as Spectra Energy Corp. and Kinder Morgan Inc. respond to the EPA proposal with plans to expand and upgrade their natural gas pipeline systems.

“I think the [EPA's] Clean Power Plan could just accelerate a lot of projects that these companies were thinking about and couldn't get across the finish line from a funding perspective,” she said during a webcast discussion on the EPA proposal held by S&P analysts.

‘Difficult' Regulatory Climate Cited

“Although the need for infrastructure is clear, the current regulatory climate makes it difficult for pipeline companies to build new assets,” Pickens and fellow S&P analyst David Lundberg said in an analysis released Sept. 3.

The Federal Energy Regulatory Commission requires pipelines to demonstrate a “market need” for new capacity by securing at least 10-year firm transportation contracts for the majority of capacity, the analysis said.

But long-term contracts don't make economic sense for most gas-fired power plants, especially those that run only when electricity demand is high, the analysis said.

So pipeline companies must rely on demand from other customers, such as producers, marketers and local gas utilities, to spur construction, it said.

Seen as New Funding Option

The EPA proposal, however, could help build momentum for a new funding option for natural gas pipeline construction that uses monthly charges on retail electric bills, the analysis said.

The idea was proposed by the New England State Committee on Electricity (NESCOE), a not-for-profit organization focusing on regional electricity issues, in April, and Spectra Energy Corp. has shown interest in testing it.

“If projects such as this one start up relatively smoothly, we expect other regulatory bodies to support similar financings, especially if the EPA directive gets adopted,” the analysis said. “This could mean a broader range of investment opportunities for midstream companies interested in expanding their natural gas assets.”

Pipeline Impacts Could Vary by Region

S&P said the EPA proposal's impact on pipelines could vary by region.

“Most pipeline projects remain concentrated in the Northeast due to the burgeoning production coming out of the region's Marcellus and, to a lesser extent, Utica gas basins,” the analysis said.

In the next five years to 10 years, the proposed power plant regulations could benefit long-haul pipelines running through areas with the greatest need to reduce emissions, including the Midwest, Kentucky and Texas, S&P said.

“To meet emission targets, additional infrastructure will have to be built in those regions, and we believe companies including ANR Pipeline Co., Columbia Gas Transmission, and Texas Gas Transmission LLC are well positioned to benefit in the longer term,” the analysis said.

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

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